Is D&O Insurance Necessary?

Directors and Officers (D&O) Insurance is required to safeguard against personal liability, whether they are facing a breach of fiduciary duty lawsuit or a creditor asserting misrepresentation. A D&O Insurance policy will ensure that your clients have the coverage they require in the event of a claim.

Why is D&O insurance important?

D&O insurance protects directors, officers, and their spouses from allegations of malfeasance while on the job. The policy also covers the assets and estates of these individuals, as well as the assets of a firm. Many of the decisions made by directors and executives may be open to claims of wrongdoing.

When should you get D&O insurance?

In reality, most institutional investor startup funding contracts will often require a D&O policy to be obtained within 90 days of closing the financing.

How important is do insurance?

Businesses that plan ahead for the renewal of directors’ and officers’ (D&O) insurance policies have the best chance of keeping their carefully managed restructuring plans from being derailed by rising costs and reduced availability.

Why is D&O insurance so expensive?

The size of the company is the most common factor in influencing the cost of D&O insurance. Annual income, total financing, number of funding rounds, number of paying users, and other factors all contribute to a startup’s scale.

Do startups need D&O insurance?

Any startup that wants to attract top people, acquire funding, or eventually go public needs directors and officers insurance (D&O). It’s a form of liability policy that protects your company from litigation stemming from decisions made by its directors and officers while running the company.

Many candidates will not apply for a leadership or board position unless they have this type of insurance, which covers litigation and settlement fees if a former employee, vendor, or other stakeholder sues them over a business decision or a charge of mismanagement.

Without this protection, a director or officer would be responsible for paying for their own legal defense. So long as the policy is in effect, D&O insurance covers the personal assets of both current personnel of the company and those who leave it.

Many private equity companies and venture investors, especially those with a strong financial sheet, demand D&O insurance before investing in a company.

What does a D&O policy cover?

Directors & Officers (D&O) Liability insurance is designed to protect corporate directors and officers from personal damages if they are sued by the firm’s workers, vendors, customers, or other third parties. Defense fees, settlements, and other expenditures linked with wrongful act charges and lawsuits can be covered by D&O insurance. Directors and Officers insurance is a crucial part of a risk management strategy for your company, and it may help you attract and keep skilled executives and board members.

Does a startup need insurance?

Business insurance should be regarded a must for most organizations today, especially startups. When you’re starting a business, it’s difficult to know what insurance coverage you’ll need.

Certain types of insurance are required by law, but other options might provide additional coverage for company associates, employees, or potential investors.

Finally, whether you’re a little business or a giant corporation, insurance is required to safeguard your employees and stimulate investment in the company you’ve worked so hard to build.

We are here to help you identify the proper insurance kinds for your startup. Finding the right insurance types for your startup might be difficult, but we are here to help.

Why do private companies need D&O insurance?

Many private firms and non-profit organizations believe that directors’ and officers’ (D&O) liability insurance is unnecessary, in part because they believe that the only significant source of responsibility for a director or officer is a disgruntled shareholder. Shareholder litigation, on the other hand, make up a small part of all recorded claims against directors and executives. Other parties, such as employees, customers, creditors, vendors, competitors, and regulators, can file D&O cases, and these risks remain regardless of the number of shareholders or whether the company is private, non-profit, or public.

There are numerous risks that could jeopardize the personal assets of directors and executives of privately held and non-profit corporations, as well as their spouses’ and estates’ personal assets.

Legal Standards of Conduct for Directors and Officers of Privately Held Companies and Non-Profit Organizations

The legal norms of conduct for directors and officers of privately held and non-profit firms are the same as for publicly traded corporations. In carrying out their responsibilities, all directors and executives must adhere to three essential principles:

Directors and officials of privately held enterprises and non-profit organizations may be held liable for alleged breaches of these duties.


Though most businesses’ bylaws provide some form of indemnity to their directors and officers, there are many instances where corporations are unable (or unwilling) to do so. Here are several examples:

  • Derivative claim: A claim is filed on behalf of a corporation, and indemnification is not permissible in some countries.
  • a translation of “trustworthiness:” A corporation is not compelled to indemnify its directors and officers in many jurisdictions if the director or officer does not act in good faith “With good faith.”
  • Some organizations’ bylaws prohibit indemnity for specific activities, hence it was agreed not to indemnify. In most cases, claimed fraud or willful misconduct are not activities for which a director or officer can be held liable. D&O insurance is the only buffer between a claim and an individual’s personal assets in the instances above.

Private Company Exposures:

Employee claims of harassment, discrimination, and wrongful termination have been filed against the corporation and its directors and executives. These claims (often known as employment practices liability – EPL) against the entity and individual insureds can be addressed by a properly constructed private or non-profit D&O insurance program.

Customer, client, and consumer group claims: Harassment, discrimination, civil rights violations, contract disputes, misleading claims, and fraudulent advertising are all common allegations. Clients might also become claimants in the case of the company’s financial impairment.

Competitors, suppliers, and other contractors’ claims: Antitrust breaches, unfair competition resulting in lost business for the competitor, and patent, trademark, and trade secret infringement are all common allegations.

Third-party claims: Third-party claims range from environmental damage to employee health and safety. Additionally, certain regulatory authorities, such as the SEC and the DOJ, may conduct investigations and bring claims against privately held and non-profit corporations for suspected or actual wrongdoing.

Suits brought by private shareholders, bondholders, or other investors or lenders are known as shareholder/lender claims. Alleged deception and insufficient or erroneous disclosure in financial reporting of private placement documents are examples of claims. These stakeholders rely primarily on the materials and assertions produced by private corporations due to the absence of financial data available from private companies. Other shareholder claims that have an impact on private corporations include:

  • Breach of the duty of care in the manner in which the directors and officers handle the sale of a corporation or in the manner in which they miss a significant commercial opportunity for the corporation.
  • Breach of the duty of loyalty in connection with transactions involving companies owned in whole or in part by one or more of the corporation’s directors and/or officials.

Mergers and acquisitions (M&As): A private or non-profit company might be the buyer or seller in an M&A transaction. D&O insurance can protect you from a variety of potential claims, including:

  • Financial misstatements or false representations concerning the company’s revenue sources or market share are alleged.

Many private companies are run by, or have founding members (and occasionally their families) directly involved in the day-to-day operations through their ownership holdings in the company, resulting in:

  • When family members are part of an ownership trust, they may have legal disagreements about the running of the firm or possible transactions.
  • In the case of an unexpected change in leadership due to illness or death, poor succession planning can result in leadership vacuums and/or disagreements.

Why Do Private and Non-Profit Companies Need D&O Insurance?

  • To safeguard the personal assets of directors and executives, as well as the wives and estates of these individuals.
  • Before a potential initial public offering, to build a relationship with an insurance (IPO).

What Do Private and Non-Profit Company D&O Policies Cover?

The board of directors, executive officers, and employees of a private firm are covered by D&O policies for claims brought against them in their roles as such. These policies also protect the corporate body for alleged breaches of duty, negligence, error, misrepresentation, misleading statement, conduct or omission in the course of their management responsibilities. Private and non-profit companies’ D&O plans frequently contain wide coverage for claims involving violations of employment practices rules, reducing the need for a separate employment practices liability policy. Annually, program restrictions and coverage provisions should be evaluated.

Risk to Specific Types of Entities:

  • Liability claims based on employment practices A increase in “doctors’ claims” if a doctor loses his or her hospital privileges, which might happen after a merger of healthcare organizations or the acquisition of a multi-physician practice by a healthcare organization. These claims are usually a mix of D&O and EPL allegations.
  • Antitrust claims against healthcare businesses that have merged or acquired other companies are still a hot topic. Increased antitrust activity has been raised in this field as a result of joint ventures and purchasing cooperatives formed in this space.
  • The effect of health exchanges on managed care firms and the future of the Affordable Care Act The high exposure population that has signed up for these plans has resulted in considerable losses for public health exchanges or public markets designed to administer government regulated and standardized health care plans by managed care businesses. As a result, many (but not all) managed care firms have suffered financial losses. Though the change in government and the likely repeal of the Affordable Care Act (in whole or in part) are expected to alter the healthcare landscape, it is too early to say how; any meaningful changes will most likely take many years.

Foundations: Foundation corporate governance is frequently criticized, particularly when there is a perception of poor succession planning and high executive remuneration. There have also been allegations of apparent inefficiencies in the allocation of cash raised for the claimed objective.

Higher Education: A number of issues affect higher education institutions, including troubled not-for-profit higher education. According to Moody’s, one out of every ten institutions is in financial difficulties due to declining revenues and poor operating performance, which is exacerbated in graduate programs, where law schools are suffering historic enrollment declines. Anti-trust, D&O, and EPL claims brought by doctors, to name a few, are all risks that higher education institutions with hospitals face.

Private Companies in Financial Distress: Private companies in financial distress can face the same negative consequences as public companies, including claims of misrepresentation or breach of fiduciary duty brought by secured creditors (lenders, banks, financers, board represented equity holders) and unsecured creditors (vendors, equity holders without board representation) against the company, its board of directors, and officers.

Are directors personally liable?

Becoming a director confers prominence and a direct influence on a company’s strategy and success. How much leeway does a director have to act on his or her own? What responsibilities and obligations should a director be aware of?

This is the third of four articles outlining the general responsibilities and potential liabilities of an English private company director (which is not in a group with a PLC).

A company’s day-to-day management is delegated to its directors by its shareholders. The shareholders appoint the directors at first, and they can normally appoint more directors up to the limit stipulated by the articles of organization.

The board of directors makes decisions on behalf of the directors collectively. Unless just one director has been selected, a director cannot operate as a director on his own. At board meetings, decisions are made by a majority vote or by a written resolution signed by all of the directors.

The position and abilities of the director are essentially described in the articles of incorporation and, if he is also an employee, in his service contract.

Ordinarily, a director’s appointment does not provide executive authority. Most directors, on the other hand, are also firm workers with specific rights allocated to them. A managing director is typically given broad authority to make daily decisions on behalf of the organization. Other directors, such as sales and finance directors, will have a less role to play.

Directors have a responsibility to the firm and, if insolvency is a possibility, to creditors (see Directors andinsolvency). Under the Companies Act 2006, certain fundamental director responsibilities have been made statutory (the “Act”). The corporation is owed these responsibilities. (For further information, see What are the responsibilities of a director? Part I: statutory responsibilities, and Part II: other general responsibilities).

A variety of other statutory obligations and limits apply to directors. These include a responsibility to keep accurate books and records, as well as prohibitions on engaging in certain transactions with the firm or accepting loans from it. Breach of these responsibilities and standards can result in a director’s disqualification from acting as a director, as well as personal culpability in certain situations (see below). Some circumstances of personal liability can be covered by insurance.

Personal liability

A director may be personally liable in addition to the scenarios listed above, in which he or she may be obliged to account for cash received or indemnify the firm against losses incurred:

  • If the firm fails to comply with any of the requirements in The Companies (Trading Disclosures) Regulations 2008 and fails to make the trading disclosures required by those Regulations (Regulation 10 of The Companies (Trading Disclosures) Regulations 2008), the company may be subject to a fine.
  • Section 51 of the Act prohibits him from signing contracts supposedly on behalf of the firm before its incorporation.
  • if he manages the firm while disqualified or on the orders of someone he knows is ineligible (section 15 of the Company Directors Disqualification Act 1986);
  • if he was previously a director of a company that went into insolvent liquidation and is now involved in the carrying on of business by another company under a name that is the same as or similar to the insolvent company’s name within 12 months before it went into liquidation (section 217 of the Insolvency Act 1986);
  • If The Pensions Regulator has issued him a contribution notice on the grounds that he was a party to, or knowingly assisted in, an act or failure to act, one of the main purposes of which was to remove or reduce an employer’s requirement or ability to pay a debt due under section 75 of the Pensions Act 1995 on the winding up of a pension scheme;
  • If someone makes a false or negligent misrepresentation in the course of negotiating a contract between the company and a third party, he may be held liable for damages.
  • under the criminal offence of making a false statement pertaining to the operations of the company with the goal of deceiving shareholders or creditors of a corporation (section 19 of the Theft Act 1968);
  • under the criminal offences of dishonestly making an untrue or misleading representation where the person making it knows that it is, or might be, untrue or misleading, and dishonestly failing to disclose to another person information that he is legally obligated to disclose, both of which require the intent to make a profit or cause loss or risk of loss to another person (sections 2 and 3 of the Fraud Act 2006),
  • If he is knowingly a party to a firm carrying on its business with the intent to mislead creditors of the company or another person, or for any fraudulent purpose (section 993 of the Act), he faces up to ten years in prison or a fine.
  • if he fails to make it apparent that he is contracting on behalf of the firm and not as an individual;
  • a third party for damages for violation of an implied warranty of authority if he concludes a contract on behalf of the company but does so outside of his authority, allowing the company to set the contract aside; or
  • in regard to the company’s illegal or fraudulent trading under the Insolvency Act 1986 (see Directors and insolvency).

A number of legislation state that if a firm commits a criminal offense, a director is additionally responsible if the offense was committed with the consent or connivance of the director, or was attributable to any negligence on the part of the director. ‘Consent’ in this sense refers to being aware of what is going on and agreeing to it, whereas ‘connivance’ refers to awareness combined with a negligent refusal to prevent it. ‘Neglect’ implies that no knowledge of the matters constituting the offence is required; rather, there is a failure to act when obligated to do so.

Corruption and Bribery

The Bribery Act of 2010 (“BA 2010”) took effect on July 1, 2011. It broadens the definition of bribery to include all transactions in the private sector (previously, bribery offences were confined to transactionsinvolving public officials and their agents).

  • soliciting, agreeing to receive, or accepting a bribe (section 2) is a general offence.
  • Bribing a foreign public official to obtain or retain business is a separate crime (section 6); and
  • Commercial organizations that fail to prohibit bribery by persons acting on their behalf, when the bribery was intended to achieve or keep a business advantage for the commercial organization, are subject to strict responsibility (section 7).

When a company (rather than just individuals acting on its behalf) is convicted of an offence under sections 1, 2 or 6 (offering or receiving a bribe, or corrupting a foreign public official), the company’s directors may be held accountable. If it can be proven that they “consented” to or “connived” in the bribery, they will be exonerated. While the terms “consent” and “connivance” aren’t defined, they’re understood to signify things like knowing there’s a good probability bribery is going on but doing nothing to investigate or stop it.

The director must have a close relationship to the UK, such as being a British citizen, an individual normally resident in the UK, or a British Overseas citizen, in order to be held accountable.

A director who is convicted of any of these crimes faces a maximum sentence of ten years in prison and/or an infinite fine. A director who is guilty of bribery could be barred from holding a directorship for up to 15 years.

If a company employee bribes another person for the company’s profit, the corporation commits an offence, subject to the “appropriate processes” defense stated below. The term “affiliated” with the company shall be interpreted broadly. If a person conducts services for or on behalf of the firm, regardless of the role in which they do so, they are considered “affiliated” with the company. This could include agents, employees, subsidiaries, middlemen, joint venture partners, and suppliers, all of whom could potentially be held liable for the company’s (and its group’s) actions.

Furthermore, this is a case of strict liability. This implies that a motivation does not need to be proven. If the corporation is found to be in violation of this clause, it could face an unlimited penalties.

If the corporation can show it had “sufficient procedures” in place to prevent bribery, it will have a defense. The BA 2010 does not define “appropriate procedures,” however the Ministry of Justice has provided guidance (“Guidance”) on what acceptable procedures might entail. This guidance lays out six principles for businesses to follow, all of which are intended to help businesses understand the types of practices they should implement to prevent bribery within their organization. These are the following:

While this is a corporate offense rather than a violation by individual directors, the board must be satisfied with the company’s overall strategy to bribery prevention. In addition to a general risk assessment of the firm’s business, it’s likely that a review of the company’s current procedures, in conjunction with the Guidance, will be required in order to put in place measures that ensure the company has”adequate procedures” in place to prevent bribery.

Health and Safety

Individual directors do not bear responsibility for health and safety issues; instead, the corporation has accountability. However, if a ‘body corporate’ commits a health and safety violation with the consent or connivance of a director, or if the violation is related to his negligence, he may be prosecuted (section 37 of the Health and Safety at Work etcAct 1974). (In this context, consent involves being aware of the circumstances and risks, whereas connivance means being aware of the risks but doing nothing about them.) Neglect is defined as a willful breach of a duty of care.) If convicted, a director might face up to two years in prison and an unlimited fine (Schedule 3A of the Health and Safety at Work etc Act 1974), as well as being barred from serving as a director for a length of time (section 2(1) of the Company Directors Disqualification Act 1986).

One of the goals of the Health and Safety Executive’s (“HSE”) enforcement policy statement is to guarantee that directors are held accountable in the courts if they fail to meet their health and safety obligations. Inspectors from the Health and Safety Executive have been advised to pay special attention to the management chain and the role played by individuals in any health and safety violations. Each year, the HSE’s annual report will name organizations and people found guilty of health and safety violations.

The HSE and the Institute of Directors have issued recommendations on corporate directors’ health and safety obligations, suggesting that each board:

  • acknowledge their mutual responsibility for the organization’s health and safety leadership;
  • guarantee that each board member accepts personal responsibility and ensures that their actions and decisions at work promote the board’s health and safety messages;
  • Ensure that all choices are made in accordance with the organization’s health and safety policy;
  • urge all levels of employees to take an active role in health and safety; and
  • maintain current on key health and safety risk management topics, and evaluate its health and safety performance on a regular basis, at least once a year.

Although the suggestions are not legally binding, prosecutors may consider whether or not to pursue criminal charges against a director in the case of an accident if they are not followed. Implementation of the guidelines, on the other hand, should allow directors to demonstrate that they have followed the law.


The common law offence of manslaughter by gross negligence applies to companies and persons (including corporate directors and management) when (according to R v Adomako3 AllER 79):

  • The violation was so egregious that the defendant’s conduct may be considered criminal and deserving of punishment because the defendant showed such contempt for the deceased’s life.

An individual’s conviction for gross negligence The maximum sentence for manslaughter is life in jail.

The Corporate Manslaughter and Corporate Homicide Act 2007, which replaces the common law offence of manslaughter by gross negligence for companies, partnerships, trade unions, and other organizations in the UK, creates a new offence of corporate manslaughter (also known as corporate homicide in Scotland). A company is guilty of corporate manslaughter if it:

  • A person’s death is caused by the way its operations are managed or organized;
  • the death is caused by the organization’s gross breach of a duty of care owed to that person; and
  • The senior management of the company had organized or handled the company’s activities in such a way that it was a significant part of the breach.

Individuals are not covered by the Corporate Manslaughter and Corporate Homicide Act, but if found guilty, an organization faces an unlimited fine.